Business confidence drops 9% on higher interest rates and falling dairy prices

New Zealand business confidence extended its slide from a record high to a third month, in the face of rising interest rates, declining dairy prices and a persistently high kiwi dollar.

A net 53.5 percent of firms are optimistic about general business conditions this month, down from 64.8 percent in April and a 20-year high of 70.8 percent in February, according to the ANZ Business Outlook survey.

"Economic momentum is clearly easing," said Cameron Bagrie, chief economist at ANZ Bank New Zealand. "All up, it's of little surprise to see most survey indicators nudging lower but still well north of 'average', implying we're still in an economic sweet-spot."

Agriculture was the most pessimistic sector, dropping 12 points to 30.6 percent, which may in part be driven by a drop in prices for global dairy products.

Dairy prices fell to a new 15-month low in the latest GlobalDairyTrade auction last week, after spiking up in early 2013. Dairy is New Zealand's largest export, making up 30 percent of goods headed offshore.This morning, Fonterra Cooperative Group, the world's largest dairy exporter, forecast a 17 percent drop in its milk payout for 2014/2015.

The New Zealand dollar softened after the report. It was recently trading at 85.44 US cents from 85.60 cents immediately before the 1pm release.

Construction was the most bullish sector at 63 percent, having slipped from 65.4 percent in the previous month. Services slipped to 61.1 percent from 68.5 percent. Retail plunged to 51.4 percent from 71.1 percent and manufacturing slipped to 40.6 percent from last month's 61.3 percent.

The performance of manufacturing index slipped in April, while government data earlier this month showed retail sales grew at a slower-than-expected pace in the first quarter of this year as the Reserve Bank kicked off a cycle of interest rate hikes to put a lid on inflationary pressures.

The Reserve Bank has signalled more interest rate increases are to come although the pace may slow as the kiwi dollar remains high, which is exerting downwards pressure on tradable inflation.

A net 88.7 percent of those polled expect interest rates to rise, up from 86.3 percent last month, while those expecting to raise prices fell to 27.5 percent from 30.2 percent and inflation expectations declined to 2.55 percent from 2.59 percent. Exports slid to 24.7 percent from 34 percent.

Firms' confidence about their own activity outlook eased back to a net 51 percent from 52.2 percent and investment intentions fell to 23.4 percent,from 29.5 percent, while expectations of taking on workers, was flat at 29.8 percent. Those seeing higher profits ahead slipped to 31 percent from 35.7 percent.

(BusinessDesk)